The Hellhound of Wall Street

by Michael Perino

  In early 1929, Brown went all the way to 55 Wall Street to complain yet again. Despite the rising stock market, his portfolio had gone down in value. Or, at least he thought it had gone down in value. National City was trading his account so violently, Brown said, he could not tell where he stood. “I told them,” Brown recounted, “that I was fearful that a reaction in the market might wipe me out and that I had no income on which to depend.” The manager in New York recommended even more transactions. Brown should sell everything he had and put all his money in City Bank stock, Anaconda Copper, and a few other stock offerings the company was sponsoring. The audience in the room chuckled again when Brown related the next advice he received, “sit still on that and see what happens.”

  What happened was the crash. In September 1929, as prices began to dip, Brown went into the company office in Los Angeles and said he wanted to sell everything, not exactly what the salesmen at the company wanted to hear. “I was placed,” Brown recalled, “in the category of the man who seeks to put his own mother out of his house. I was surrounded at once by all of the salesmen in the place, and made to know that that was a very, very foolish thing to do.”

  “That is,” Pecora inquired, “to sell your stocks?”

  “Especially,” Brown said, “the National City Bank stocks.” Brown was advised to “sit tight”; the City Bank stock was trading at $525 and was bound to “go to $750 at the very least.” When the crash came a month later, the company sold out all of Brown’s stock. He had lost nearly everything. “I am now 40 years of age,” he wrote the company, “tubercular—almost totally deaf—my wife and family are depending on me solely and alone and because of my abiding faith in the advice of your company I am to-day a pauper.” After Brown’s testimony, a New York columnist wrote, “When the American banker comes before the public today and says piteously, ‘Why don’t you trust me?’ he should not be surprised if he is greeted with a derisive laugh.”13

  Brown was left with $25,000, and he wanted the company to lend him money so he could buy more Anaconda Copper stock on margin as a way to try to recoup his losses. Brown, it seems by this point in his investing career, had developed some of the same bold gambling instincts as Mitchell. Brown, unlike Mitchell, never got the chance to make the bet, because the company refused to let him borrow. Had he invested, he would have lost virtually everything he had, so perhaps National City was looking out for him in this one instance. Then again, maybe not—the company said his income was no longer sufficient to support the margin loan he requested.14

  By the end of Tuesday, seventeen states had legislation already passed or in the works to restrict withdrawals or to close up their banks. In Pennsylvania, the legislature was still drafting the required laws, but troubled banks couldn’t wait. Already depositors in Scranton and Erie could only withdraw 5 percent of their money. The First National Bank of Tennessee and People’s National Bank of La Follette, Tennessee, mailed notices to all customers immediately restricting withdrawals while a holiday took effect in Memphis. Five banks in Kansas closed their doors for good. A bank in Van Buren, Arkansas, tried to prevent customers from closing out their accounts by paying depositors with silver dollars. It worked with at least one customer who, unable to haul away the fifty-pound bag of coins he was given, handed it back to the teller and stormed out of the bank.15

  In Maryland, the governor extended the holiday for yet another day, and the situation was beginning to grow more difficult. Relief agencies in the state were already reporting an upswing in requests for food. City workers in Baltimore, who had just received their now useless paychecks, threatened to strike when the mayor announced, “City Hall is not in the check-cashing business.” The mayor quickly capitulated to his angry employees.16

  The panic now spread to Washington, D.C. The capital’s fourth largest bank, the Commercial National Bank, closed its doors and placed itself in receivership. Two other banks in the District of Columbia suspended withdrawals. In the scheme of things the Washington closures were small potatoes, but the psychological impact was enormous. “If banks could fail in the shadow of the United States Treasury, at the very door of the R.F.C.,” one contemporary commentator wrote, “what then?” Everywhere people gathered they were talking about the fast-collapsing banks. “It seems,” one observer wrote that day, “every depositor in the country wants to withdraw his money.” And it wasn’t just the United States. Bankers in Cuba, where interest in the Senate hearings was enormous, prevailed on military leaders to issue an order prohibiting Cuban newspapers from printing any story about the United States banking crisis, lest the panic spread to the branches of New York banks located there.17

  That same day, Senator Costigan’s resolution to continue the investigation into the next session of Congress came up for a vote. The discussion was brief and focused almost entirely on what Pecora had uncovered in a little over a week rather than what the investigation had done over the preceding year. The disclosures, Costigan argued, “are justly attracting nation-wide attention.” Given the outcry, it would have been political suicide to oppose continuing the investigation, a point Costigan made sure to express explicitly on the off chance any of his colleagues failed to see the utterly obvious. “It is assumed,” he continued, “that no Member of the Senate will desire to interfere with that highly important investigation at a time when general public agreement is being expressed on the overwhelming necessity for remedial enactments by Congress to guard, so far as humanly possible, against the recurrence of such conditions as have been and are being revealed by the testimony.”

  Costigan’s assumption was spot-on; Congress passed the resolution unanimously.18

  Chapter 15

  DAY NINE: A FREE AND OPEN MARKET

  By the end of Wednesday, Alabama, Kentucky, Louisiana, and Tennessee joined the parade of bank holidays. Kentucky’s closures were the most ironic; in order to get the banks closed, state law required Governor Ruby Laffoon to declare official “days of thanksgiving.” All told, twelve states—25 percent of the country—had now closed their banks or restricted withdrawals to tiny percentages of deposits. State officials in West Virginia gave individual banks under pressure the option of shutting themselves down.

  Other states had not yet acted, but they were ready to do so at a moment’s notice. Idaho’s governor had the power to shut down banks, while the legislature in Minnesota gave that power to the state’s banking commission. Where banks remained open, people searched for any sign the contagion had spread. In Jamestown, New York, just 150 miles northeast of Cleveland’s closed banks, the future Supreme Court justice Robert Jackson was nervous. Every morning on his way to his law office he drove out of his way to check if there was a line outside the Bank of Jamestown, where he sat on the board. The bank was in poor shape, and Jackson knew that a run would kill it, ruining both his finances and his reputation. Luckily for Jackson the bank was, so far, quiet.

  Reform proposals that were laughed off in Washington as absurd just a few months earlier were now getting a serious hearing in the waning days of the congressional session. As workers hung bunting all around the capital and thousands of inaugural spectators streamed into the city, Michigan senator Arthur Vandenberg renewed calls for a federal guarantee of bank deposits while Texas representative John Patman believed “the Government should consider seriously the proposal of taking over the banks, not as a governmental policy but as a governmental necessity.”1

  The first witness on Wednesday morning was Horace Sylvester, the head of the company’s municipal bond department. This was not his first appearance in the limelight. He was a well-known municipal bond expert, but as far as the general public was concerned he was better known as a peripheral player in the molding of an American legend. In October 1926, Sylvester’s eleven-year-old son, Johnny, was extremely ill; doctors said he might die. To cheer his ailing son, the banker wired Yankee slugger Babe Ruth, Johnny’s idol, asking for a signed baseball. Airmail packages arrived at the Sylvester home car
rying balls signed by both World Series combatants, the Yankees and the St. Louis Cardinals. Ruth, however, thought Johnny’s plight needed an even bigger gesture. In what quickly became part of Ruth lore, the Babe promised to hit a home run for the boy. Then he went out and hit three. When Johnny recovered, breathless news reports attributed his cure to the Bambino, whose larger-than-life performance raised the boy’s spirits. Horace Sylvester’s son was suddenly “the most famous little boy in America.”2

  Horace Sylvester could have used something to raise his own spirits on that first day in March 1933. The forty-nine-year-old banker with the round face, thin mustache, and pronounced wattle was in Room 301 to clear up a bit of mysterious testimony that Pecora had elicited the day before. Sylvester’s testimony that Wednesday moved the City Bank disclosures from the immoral, unethical, and improper to what seemed like something that, if not outright illegal, showed a complete and utter disregard for City Bank’s shareholders, Sylvester’s obligations as a corporate officer, and whatever diaphanous tissue separated the bank and the company.

  Just after lunch on Tuesday, Pecora briefly suspended his inquiry about the Minas Geraes bonds to put National City’s treasurer, Samuel Baldwin, in the witness chair. Baldwin’s testimony was brief and cryptic, and what it revealed sounded fishy. In 1931, National City handled a huge $66 million bond offering for the Port Authority of New York. One day shortly after the company completed the offering, Baldwin got a call from Sylvester asking Baldwin to give him $10,200 in cash and to charge the amount as a “syndicate expense” to the Port Authority offering. Baldwin never learned what the cash was for but he testified that it was unusual to pay expenses in cash. “Do you know,” Pecora asked, “of any other instance of a similar character where a sum of money amounting to several thousand dollars or more was drawn out in cash and charged to expenses?” Never, Baldwin replied, while he was treasurer. Pecora dropped the subject after establishing that independent auditors never examined the company’s accounts, but alerted the committee (and the reporters) that Sylvester would be in Washington the next day.3

  Now with Sylvester in Room 301, Pecora cleared up the mystery surrounding this odd transaction. Sylvester gave the cash to a City Bank employee named Edward Barrett who in turn “loaned” the money to John Ramsey, the Port Authority’s general manager. Ramsey was “in a financial jam” and, although City Bank’s policies prohibited it from making an unsecured loan to him, Barrett didn’t want to leave his friend in the lurch. Barrett went to Sylvester and the municipal bond manager decided to make this “accommodation” for Ramsey because Ramsey was “a good moral risk.” The transaction was never recorded as a loan, Sylvester never knew the terms of the loan, and he never pressed for it to be repaid.4

  Having exhausted Sylvester’s knowledge, Pecora turned to Norbeck. “Mr. Chairman, I ask that a subpoena be issued for Mr. Edward F. Barrett, returnable tomorrow.” Before Norbeck could respond, however, Sylvester spoke up, “Mr. Pecora, Mr. Barrett is in the room if you would like to see him.” Pecora whirled around, “Oh, is he?”

  Barrett took the stand. His story did little to show that City Bank employees were jealously guarding shareholder interests. He claimed to have a note for the loan, but did not know where it was and, in any event, it was a note to Barrett personally, not to the company. The banker did not have a good explanation for why the loan was made in cash rather than by check, other than that Ramsey needed the money right away. Barrett testified that it was supposed to be a temporary loan (just “two or three weeks or a month”), but nearly two years later no interest or principal had ever been repaid and Barrett had not even asked Ramsey to do so. Barrett explained his reluctance: Ramsey’s “salary had been cut two or three times, and I knew that he could not make any payment, and I did not want to embarrass John Ramsey.”

  Ramsey, Pecora asked, received a loan because he was a friend of Barrett’s?

  “Precisely,” Barrett replied. “The one reason that I went to help him was because he was a friend of mine, and a very good friend of mine for ten years’ standing, and I have always found him a very high-standing fellow, and I wanted to help him if I possibly could.”

  Pecora wanted to emphasize just how good a friend Barrett had been: “So you helped him with the funds of the National City Co. with which you were not connected, didn’t you?”

  Perhaps it truly was a loan; the transaction, after all, occurred about six weeks after National City underwrote the bonds, hardly the ideal time to bribe an official. Sylvester was adamant on that point, pounding the table and denying any wrongdoing. It would have been a silly bribe in any event—Ramsey had no authority to award bond offerings to National City or any other investment bank. Indeed, the Port Authority subsequently refused to accept Ramsey’s resignation (he explained that he thought he was receiving a loan personally from Barrett, which was why he made out the note to Barrett). Sylvester was indicted for forgery, but the charges against him were dismissed.

  But if it wasn’t a bribe it was a blatant misuse of company funds, although one that now hardly seemed surprising. If nothing else, Pecora had shown over the past eight days that City Bank’s executives gave little thought to the obligations they owed the bank’s shareholders. After the millions in morale loans and the bonuses, $10,200 seemed like nothing, but that $10,200 firmly cemented public perceptions of City Bank. “Of course this was not a bribe, or a bid for future business from the Port Authority,” the Nation wrote sarcastically. “Heaven forbid! It was just a generous kindly act to take care of a good man who happened to be in a jam. Why not give him $10,200 of the stockholders’ money and overlook such matters as collateral and interest? That’s the way to make friends for the bank!”5

  The real star of that second-to-last day of the hearings was not Horace Sylvester; it was the New York Stock Exchange president Richard Whitney, who was making his return engagement in Washington. It had been almost a year since Whitney’s previous appearance before the committee. So much had changed in the interim, not only in the success of the investigation and the skill of the lawyer prosecuting it, but in the country at large. A death rattle seemed to be reverberating through the banking sector. The diffuse anger at Wall Street had crystallized into a sharp rage directed at the elite leaders of the financial markets, not just shady short sellers and pool operators. And, with that change in the investigation and that change in the country, there was something of a change in Whitney as well.

  A day earlier in Cleveland, Richard Whitney, the man who professed ignorance the previous spring of any illegal activities on the exchange, upbraided the “ephemeral prophets” of the “boom” days. He still could not see that the New York Stock Exchange had ever acted improperly or had failed to protect the people who bought and sold in the securities markets. It was the American people as a group, he asserted, who “were careless of the qualifications of many of those who were entrusted with positions of importance and power.” The public was lulled into a false sense of security. It gave its “confidence too readily” and it was too willing to proclaim the heads of profitable companies “business or financial geniuses.” Whitney certainly sounded like he was talking about Mitchell, although he never invoked his name. As he told his audience in Ohio, “his remarks were listened to with awe and his lightest statements were accepted as the words of an oracle, without inquiry into his qualifications and training and without much thought of the soundness of his enterprise.”

  Despite his criticisms of the gullible masses, Whitney sounded downright progressive as he called for more fulsome disclosures, stricter accounting rules, and uniform laws regulating the issuance of securities, all to safeguard the investors who provided capital to industry. It was quite an about-face for a man who, just six month earlier, expressed grave doubts about Congress’s ability to adequately frame such laws. “More frank and more complete information,” he now conceded, might have avoided the huge run-up before the crash.6

  But that small concession to the propriety o
f regulation was about all he could muster. Whitney’s “maddeningly unshakable rectitude,” his overweening pride in the New York Stock Exchange, in his class, and in himself remained intact. He still ardently defended the exchange and the great service it provided for the United States. “Speculation,” he self-righteously declared, “has built this country” and the government had no business regulating it or the market on which it occurred. Indeed, trying to regulate speculation was futile, as Whitney earlier told a House committee. “You are trying to deal with human nature,” he explained. “Speculation is always going to exist in this country just as long as we are Americans.”

  Even the censures in Whitney’s Cleveland speech were not nearly so pointed as they at first seemed. Whitney still considered the leaders of Wall Street to be men of honor and conviction—the “ephemeral prophets” he singled out were largely foreigners like Krueger, not American financiers like Mitchell. But after all that had taken place in that hearing room over the previous week and a half and all that had taken place in the country since Michigan had closed its banks, his defense seemed hollow, the remnants of a bygone age.7

  Not everything had changed in the intervening year, at least not on the other side of the mahogany committee table. Some committee members, in particular Senator Brookhart, learned nothing from Pecora’s systematic examination of City Bank. As soon as Whitney took the witness stand Brookhart, who now had only two days remaining in his Senate career, began to hurl seemingly random questions at him, jumping from the Better Business Bureau, to balancing the federal budget, to rehashing testimony Whitney had given the previous spring. Brookhart still had nothing, other than rumor and hunch, to back up his questions, and Whitney continued to easily repel them in the same weary and dismissive tone he exhibited the previous spring. At one point, Brookhart asked Whitney why the Better Business Bureau never complained about the practice of stabilizing bond prices during an offering, to which Whitney disdainfully replied, “I do not claim that that is an unethical practice, Senator Brookhart, as I have stated.” Brookhart’s response was suitable for a schoolyard squabble, not a Senate hearing room: “Well, I do.”8